Don't shoot the messenger.
Australia Faces `Once-in-100-Year' Housing Slump as Prices Fall
By Jacob Greber
July 31 (Bloomberg) -- Australia may be headed for a
housing recession similar to those roiling the U.S. and U.K.
The cause is a combination of rising default rates, the
biggest drop in home prices in five years, the highest
borrowing costs in a decade and slowing economic growth.
Prices in the property market -- described by the
International Monetary Fund in April as one of the world's most
``overvalued'' -- will fall 30 percent by 2010, according to
Gerard Minack, senior economist at Morgan Stanley in Sydney.
Prices dropped in all of Australia's major cities last month
for the first time since just before the Great Depression.
``I panicked'' when the figures came in, said John
Edwards, chief executive officer of Residex Ltd., a Sydney
company that tracks property prices. ``We've been doing this
for 20 years and have data that goes as far back as 1865, and
it's really abnormal.''
Prices fell in Sydney, Melbourne, Brisbane, Perth,
Adelaide, Darwin, Hobart and Canberra by between 0.6 percent
and 2.2 percent, according to Residex. The national median
house price fell almost 3 percent to A$458,000 ($435,000).
``Australia is headed for a once-in-100-year real-estate
slump,'' Edwards said. ``I have never seen the convergence of
so many negatives.''
Rising property prices drove a decade-long consumer
spending boom that saw Australia's $1 trillion economy weather
fallout from the 1997 Asian financial crisis and the collapse
of Internet stocks in 2000.
Soaring Prices
Household debt has almost doubled since 1999 to around 160
percent of incomes, a higher ratio than in the U.S. and U.K.,
according to AMP Capital Investors. The median national house
price soared about 140 percent in the same period.
``By every metric I can think of, Australian houses are
too expensive,'' Minack said, costing an average of six years'
earnings, double what Americans paid before their property
market started falling in 2006.
The Washington-based IMF says Australian house prices were
overvalued by almost 25 percent in the decade through 2007 when
compared with household income and ability to pay debt. Only
Ireland, the Netherlands and the U.K. were higher.
A crash would ``result in a significant negative wealth
shock'' for Australians, whose spending accounts for about 60
percent of the economy, Minack said. While growth is expected
to continue for a 17th straight year in 2008, the Reserve Bank
of Australia forecasts it will slow to 2.25 percent from 3.9
percent in 2007.
Bank Stocks
A housing recession may also trigger losses at lenders
including Commonwealth Bank of Australia and Westpac Banking
Corp., whose stock has fallen more than 20 percent this year.
The nation's five largest lenders have added an average
105 basis points to mortgage rates so far in 2008 as the global
credit squeeze drove up funding costs. They were also reacting
to moves by central bank Governor Glenn Stevens, who raised the
benchmark lending rate twice this year by a total of 50 basis
points to a 12-year high of 7.25 percent to curb inflation.
Prices gained 4.5 percent in the second quarter from a year
earlier, the fastest pace since 2001.
The increases have added A$250 to monthly payments on an
average A$250,000 home loan, according to the Real Estate
Institute. Households spent 38 percent of their incomes on
mortgage payments in the March quarter, the most in the 22
years the institute has measured affordability.
`Mortgage Stress'
Sydney research company Fujitsu Consulting says 923,000
households will face ``mortgage stress'' by September, up from
171,000 a year earlier who said they were having trouble
repaying loans. Australia's population is 21 million, and 6.9
million households have mortgages.
As the pressure mounts, consumers are spending less on
televisions, cars and vacations, hurting retailers including
department store chain David Jones Ltd.
Ratings agency Standard & Poor's reported July 23 that
payments more than 30 days late on so-called prime home loans
increased for a sixth month to a record 1.49 percent in May.
Some 14.5 percent of subprime loans were 30 days late, with 7.9
percent more than 90 days late.
John McGrath, chief executive officer of McGrath Estate
Agents in Sydney, said the number of unsold homes in his market
is rising, auction rates are falling and the time it takes to
sell properties is up 50 percent from a year ago to 45 days.
``We're not even in the ballpark when it comes to
affording a house in Sydney,'' said Anthony Duckworth, 30, a
married father of one who works for a catering company.
Commuting Distance
With A$160,000 in savings, he would need a A$600,000
mortgage to buy a family home in Australia's biggest city --
double what he can afford. So he plans to buy north of Sydney
and commute.
The central bank says lending grew in May at the slowest
annual pace since 1991, when the property market collapsed amid
mortgage rates as high as 18 percent. Home-loan approvals
dropped by the most in eight years.
``It's like a debt tsunami out there,'' said Sandra Saker,
who manages a Salvation Army service for families in Sydney
overwhelmed by financial problems. ``Five years ago, the
maximum debt people came in with was about A$200,000. Now we
see people coming in with over A$1 million.''
For related news:
Australian economy stories NI AUECO BN <GO>
Stories about the Reserve Bank of Australia NI RBA <GO>
News search on property markets STNI HOUSINGMKT <GO>
--Editors: John McCluskey, Melinda Grenier.
To contact the reporter for this story:
Jacob Greber in Sydney at +61-2-9777-8635 or
[email protected]
To contact the editor responsible for this story:
David Tweed at +81-3-3201-2494 or
[email protected]
Australia Faces `Once-in-100-Year' Housing Slump as Prices Fall
By Jacob Greber
July 31 (Bloomberg) -- Australia may be headed for a
housing recession similar to those roiling the U.S. and U.K.
The cause is a combination of rising default rates, the
biggest drop in home prices in five years, the highest
borrowing costs in a decade and slowing economic growth.
Prices in the property market -- described by the
International Monetary Fund in April as one of the world's most
``overvalued'' -- will fall 30 percent by 2010, according to
Gerard Minack, senior economist at Morgan Stanley in Sydney.
Prices dropped in all of Australia's major cities last month
for the first time since just before the Great Depression.
``I panicked'' when the figures came in, said John
Edwards, chief executive officer of Residex Ltd., a Sydney
company that tracks property prices. ``We've been doing this
for 20 years and have data that goes as far back as 1865, and
it's really abnormal.''
Prices fell in Sydney, Melbourne, Brisbane, Perth,
Adelaide, Darwin, Hobart and Canberra by between 0.6 percent
and 2.2 percent, according to Residex. The national median
house price fell almost 3 percent to A$458,000 ($435,000).
``Australia is headed for a once-in-100-year real-estate
slump,'' Edwards said. ``I have never seen the convergence of
so many negatives.''
Rising property prices drove a decade-long consumer
spending boom that saw Australia's $1 trillion economy weather
fallout from the 1997 Asian financial crisis and the collapse
of Internet stocks in 2000.
Soaring Prices
Household debt has almost doubled since 1999 to around 160
percent of incomes, a higher ratio than in the U.S. and U.K.,
according to AMP Capital Investors. The median national house
price soared about 140 percent in the same period.
``By every metric I can think of, Australian houses are
too expensive,'' Minack said, costing an average of six years'
earnings, double what Americans paid before their property
market started falling in 2006.
The Washington-based IMF says Australian house prices were
overvalued by almost 25 percent in the decade through 2007 when
compared with household income and ability to pay debt. Only
Ireland, the Netherlands and the U.K. were higher.
A crash would ``result in a significant negative wealth
shock'' for Australians, whose spending accounts for about 60
percent of the economy, Minack said. While growth is expected
to continue for a 17th straight year in 2008, the Reserve Bank
of Australia forecasts it will slow to 2.25 percent from 3.9
percent in 2007.
Bank Stocks
A housing recession may also trigger losses at lenders
including Commonwealth Bank of Australia and Westpac Banking
Corp., whose stock has fallen more than 20 percent this year.
The nation's five largest lenders have added an average
105 basis points to mortgage rates so far in 2008 as the global
credit squeeze drove up funding costs. They were also reacting
to moves by central bank Governor Glenn Stevens, who raised the
benchmark lending rate twice this year by a total of 50 basis
points to a 12-year high of 7.25 percent to curb inflation.
Prices gained 4.5 percent in the second quarter from a year
earlier, the fastest pace since 2001.
The increases have added A$250 to monthly payments on an
average A$250,000 home loan, according to the Real Estate
Institute. Households spent 38 percent of their incomes on
mortgage payments in the March quarter, the most in the 22
years the institute has measured affordability.
`Mortgage Stress'
Sydney research company Fujitsu Consulting says 923,000
households will face ``mortgage stress'' by September, up from
171,000 a year earlier who said they were having trouble
repaying loans. Australia's population is 21 million, and 6.9
million households have mortgages.
As the pressure mounts, consumers are spending less on
televisions, cars and vacations, hurting retailers including
department store chain David Jones Ltd.
Ratings agency Standard & Poor's reported July 23 that
payments more than 30 days late on so-called prime home loans
increased for a sixth month to a record 1.49 percent in May.
Some 14.5 percent of subprime loans were 30 days late, with 7.9
percent more than 90 days late.
John McGrath, chief executive officer of McGrath Estate
Agents in Sydney, said the number of unsold homes in his market
is rising, auction rates are falling and the time it takes to
sell properties is up 50 percent from a year ago to 45 days.
``We're not even in the ballpark when it comes to
affording a house in Sydney,'' said Anthony Duckworth, 30, a
married father of one who works for a catering company.
Commuting Distance
With A$160,000 in savings, he would need a A$600,000
mortgage to buy a family home in Australia's biggest city --
double what he can afford. So he plans to buy north of Sydney
and commute.
The central bank says lending grew in May at the slowest
annual pace since 1991, when the property market collapsed amid
mortgage rates as high as 18 percent. Home-loan approvals
dropped by the most in eight years.
``It's like a debt tsunami out there,'' said Sandra Saker,
who manages a Salvation Army service for families in Sydney
overwhelmed by financial problems. ``Five years ago, the
maximum debt people came in with was about A$200,000. Now we
see people coming in with over A$1 million.''
For related news:
Australian economy stories NI AUECO BN <GO>
Stories about the Reserve Bank of Australia NI RBA <GO>
News search on property markets STNI HOUSINGMKT <GO>
--Editors: John McCluskey, Melinda Grenier.
To contact the reporter for this story:
Jacob Greber in Sydney at +61-2-9777-8635 or
[email protected]
To contact the editor responsible for this story:
David Tweed at +81-3-3201-2494 or
[email protected]
